WORLD FOCUS: The Icelandic model

May 22, 2014

Joshua Fleitman, a junior at the College of William & Mary, in his award-winning essay published in the spring issue of the Monitor, the journal of International Studies at W&M, wrote, "In September 2008, the failure of Lehman Brothers, a powerful American investment bank, triggered a global financial crisis. Contagion spread through financial and trade linkages throughout the world. The scope and magnitude of the crisis differed in every affected country. Iceland, a small island nation in North Atlantic, was hit especially hard by the crisis, and its economy was the first to collapse in 2008."

That a junior at the College of William & Mary could write an award-winning essay about a financial crisis that had global dimensions seems to confirm the judgment of U.S. News & World Report, which ranked William & Mary first among public universities for excellence in undergraduate teaching and the third among all universities - private or public - behind only Dartmouth and Princeton.

Fleitman, gives credit to Brian Blouet, professor of geography at William & Mary, for "teaching me to think about the world in a geographic way."

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Joshua Fleitman

In his essay, Joshua, didn't chart only the transformation of Iceland's economy from one based on subsistence agriculture and fishing into a financial center that by 2007 made Iceland's per-capita income $60,000, more than four times higher than the world average. He also described in detail how the boom by 2008 invariably led to a bust of disastrous proportion. In the first quarter of 2010, the peak of the financial crisis, he writes, Iceland's GDP contracted by 6.9 percent and unemployment rate rose to 9.4 percent.

Then Iceland's fortunes changed. According to Fleitman's research, by fiscal year 2012, Iceland was on the way to recovery, with its GDP having grown by 2.7. percent and unemployment dropping to 5.6 percent.

What lends Fleitman's research paper extra quality is his ability to flesh out the numbers with human interest stories that explains a lot about why Iceland first stagnated, then flourished, stumbled and finally is on the way to recovery.

"Until the 1990's, Iceland's economy was largely state-run," he writes. "The Icelandic government owned a majority of the country's banks, controlled prices for agricultural goods, set the exchange rate for the currency, controlled imports, and had a well-developed welfare system. ... A political elite of fourteen powerful families, known as 'the Octopus,' benefited greatly from state's role in the economy."

In the 1980s, the strong conservative ideas of British Prime Minister Margaret Thatcher and of President Ronald Reagan found an echo among the young, well-educated and the increasingly globally minded segment of the population. A consensus developed that Iceland ought to reject the standard Scandinavian welfare-state model in favor of a free-market system.

Liberal economic reforms transformed Iceland's economy from an inward-looking domestic operation to one of the most open and interconnected of any member state of the Organization for Economic Cooperation and Development, he noted. Over the next 10 years, the new class of "young Viking entrepreneurs" made Iceland a center for international finance.

A massive amount of international assets reached the Icelandic financial sector and the neo-liberal economic ideology pursued by the government ensured minimal regulations of the banks and financial institutions. International financial expansion brought considerable prosperity to Iceland. The economy grew by 8 percent each year, and Iceland got the nickname "Nordic Tiger."

Then the collapse of Lehman Brothers initiated a global financial crisis, which locked up inter-bank credit and cut off the capital that Icelandic banks needed to pay off their obligations. Many foreign depositors lost their savings and Iceland economy was deeply hurt.

But according to Fleitman, "in an act of independence, much in the tradition of Iceland's Viking settlers, the new Icelandic government pursued a set of policies that deviated from prevailing orthodoxies for responding to financial collapse."

In his 20-page essay, he provides a primer on how the global economy works.

Frank Shatz lives in Williamsburg, Va. and lake Placid. His column was reprinted with permission from the Virginia Gazette.